Despite the strengthened U.S. economy, many homeowners are still behind on their mortgages. Fortunately, there are many options for homeowners with underwater mortgages, but the choices can be overwhelming. From filing for bankruptcy to a loan modification, homeowners will do what it takes to avoid foreclosure. Even the federal government has gotten involved, enacting the Home Affordable Modification Program to help homeowners. But are some solutions better than others?
The Best Strategy to Avoid Foreclosure
While filing for bankruptcy can carry an unsupported negative stigma, it’s often a better solution for avoiding foreclosure than modification programs. For instance, the HAMP program has helped over 2 million homeowners modify their loans since 2009, but statistics show that over 54 percent of those modifications have been cancelled through defaults. In other words, homeowners who opt for HAMP to avoid a foreclosure end up re-defaulting anyways. For those who are still unsure about filing for bankruptcy, other disadvantages of home modification programs such as HAMP include:
- No effect on consumer spending. Many homeowners mistake HAMP as a solution to avoid foreclosure, but it’s merely a tool. Without changing credit card habits, spending practices, and other financial behaviors, homeowners are likely to re-default after a modification.
- Banks make mistakes, too. Some analysts believe that the banks’ incompetence failed to prevent foreclosures more than a program like HAMP ever could. So while HAMP can be helpful, inefficient larger banks are partly to blame for modification failures.
- HAMP is falling short of expectations. The government had hoped HAMP would help 3-4 million homeowners, but the actual figure is more like 1.2 million to 2 million homeowners.
- Debt is not reduced. A modification only changes the terms of repayment. The debt is still there, whereas filing for bankruptcy would eliminate outstanding debt and give homeowners a fresh start to avoid foreclosure.
Homeowners that are underwater on their mortgage would be wise to seek counsel from a bankruptcy lawyer. Filing for bankruptcy triggers automatic stay, which prevents foreclosure and means that you can continue living in your home.